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The problem with Quantopian, many current robo-advisors (including some with large valuations) and other market-related fintechs is that by and large they don't

The problem with Quantopian, many current robo-advisors (including some with large valuations) and other market-related fintechs is that by and large they don't seem to have anyone who has had real success actually trading automated quantitative strategies at a serious hedge fund or tier-1 proprietary trading group on their founding teams. I've seen successful VCs, well-known academics, market gurus, people with a background in some aspect of running a mutual fund and all manner of other people who seem like they should be good, but nobody with an actual track record. I've seen people who worked on technology at hedge funds but the technology group at a hedge fund builds what amounts to plumbing like clearing, reporting etc, not the actual trading technology, certainly nothing that can actually impact PNL. Jonathan Larkin at Quantopian comes closest to what is needed and since he joined Quantopian has certainly had good success, but even his experience was more along the lines of recruiting and risk-managing portfolio managers, not actually running a large book. He certainly helps Quantopian but Quantopian is coming from a place where when it was founded, I personally had to explain what selection bias meant to John Fawcett and despite Jonathan Larkin being there, they still seem to be making some pretty basic mistakes in how the platform is setup. Spending a few years working on a tier-1 automated trading desk is absolutely essential because, what is deployed at those firms (and what you are competing with) is years if not decades ahead of academia and the rest of the industry and you learn more in a week of working on a successful trading desk (which only happens if you demonstrate a lot of not just academic aptitude), with people sharing knowledge available nowhere else than in a decade in academia or anywhere else, even other groups at the same firm, potentially sitting 10 feet away from the trading group. I'm not suggesting people steal IP or anything like that but you do have to have sone sense of what the state-of-the-art actually is if you are going to claim to have developed something state of the art. I suspect it's going to end up like the search space, where the space will be taken over by the second generation of firms that nobody has heard of who decide to do things differently from how investment management is currently run offline taking advantage of their knowledge of how mutual funds including index funds are picked off by sophisticated traders. Interestingly, Igor Tulchinsky at Worldquant and his team who are a tier-1 trading shop have basically been running a very successful version of what Quantopian hopes to become without a lot of hoopla or publicity for years, decades if you include the time they were doing this as an independent team at Millenium.

tanderson92 9y ago
> how investment management is currently run offline taking advantage of their knowledge of how mutual funds including index funds are picked off by sophisticated traders. This is news to me, I was not aware that most index funds are being front-run to such a large degree. I understand it was possible with the Russell 2000 index at some point. But e.g. the Vanguard Total Market fund (CRSP index) has almost identical performance to the Fidelity Total Market index fund (Dow Jones Total Market). And both funds replicate the performance of e.g. the Ibbotson book. How is it possible that this is occurring if the index funds are being picked off? Or do you mean style / sector index funds, not broad market?
- quantgenius 9y ago
  I don't mean to be snarky but I fail to understand why you believe that the fact that the Vanguard Total Market Fund has almost identical performance to the Fidelity Total Market fund and that both funds replicate the performance of e.g. the Ibbotson book is an argument either for or against my statement that sophisticated traders are able to make lots of money due to the actions of index funds. I don't mean to be snarky and I would really like to give you a meaningful answer but I'm not sure how to proceed and I'd like to understand why you believe the two have anything to do with each other so I can give you a higher quality reply.
  - tanderson92 9y ago
    they follow different indices and have similar returns. Please explain how this is possible while still underperforming what they 'should' be returning. Are both indices being front-run? But if they reconstitute at different times how is this possible. And yes, you do sound snarky.
    - quantgenius 9y ago
      > they follow different indices and have similar returns. > Please explain how this is possible while still > underperforming what they 'should' be returning. They are both equity indices and equities are highly correlated to each other. The first principal component of global equity returns explains over 50% of the variance. > Are both indices being front-run? Yes! If a stock is getting added (or dropped) from an index, this is typically announced (depending on the index) between 3 days and a month before the date on which the change to the index is made. The index itself is calculated assuming you bought (or sold) precisely at the close on the day of the reconstitution. Index fund managers are incentivized to match the index. They actually do worse personally if they modestly outperform the index and potentially get fired if they underperform. So every index fund manager wants to buy (or sell) the stock entering (or leaving) the index at precisely the same time on the same day. This means you could potentially have as much as a few months trading volume wanting to transact on the same side at precisely the same time. Smart traders take advantage of this by a) Buying (selling short for deletes) the stock over time before the index is reconstituted. b) Selling what they bought and short selling more (or buying) stock to the index funds at the close and c) Covering their shorts (or selling the excess stock bought) over the next few weeks. The fund managers don't care because even though a typical proprietary trading desk makes tons of money doing this, as far as their clients are concerned, they are matching the index. You could move a stock 50% in the rebalance but you wouldn't notice if you were comparing a fund's returns relative to the index. This is fairly obvious if you simply take a look at price charts of stocks entering and leaving indices around index reconstitutions. Academic studies (use google scholar for a few dozen references) estimate that the typical index addition or deletion to the S&P 500 index moves between 2-4% between announcement and reconstitution. This is an underestimate of what actually happens because adds/deletes are predictable and stocks start moving long before the announcements are made. S&P 500 stocks are the most liquid stocks on the planet and the effect is much larger for other indices. The Russell indices are not much more or less gameable than other indices per add or delete but the effects are concentrated since all Russell Index rebalances happen on a single day (fourth Friday in June) which creates massive jumps in PNL for proprietary trading desks right around that time. It's also fairly obvious if you look at the data carefully that in recent years with the increasing popularity of index funds, the indices are understating the potential returns available in the stock market. The market has done "better" than the oft-quoted returns on the indices would have you believe. > But if they reconstitute at different times how is this > possible. Why would the timing of the reconstitution have anything to do with why this is possible or not?

tanderson92 9y ago

> how investment management is currently run offline taking advantage of their knowledge of how mutual funds including index funds are picked off by sophisticated traders. This is news to me, I was not aware that most index funds are being front-run to such a large degree. I understand it was possible with the Russell 2000 index at some point. But e.g. the Vanguard Total Market fund (CRSP index) has almost identical performance to the Fidelity Total Market index fund (Dow Jones Total Market). And both funds replicate the performance of e.g. the Ibbotson book. How is it possible that this is occurring if the index funds are being picked off? Or do you mean style / sector index funds, not broad market?

quantgenius 9y ago
I don't mean to be snarky but I fail to understand why you believe that the fact that the Vanguard Total Market Fund has almost identical performance to the Fidelity Total Market fund and that both funds replicate the performance of e.g. the Ibbotson book is an argument either for or against my statement that sophisticated traders are able to make lots of money due to the actions of index funds. I don't mean to be snarky and I would really like to give you a meaningful answer but I'm not sure how to proceed and I'd like to understand why you believe the two have anything to do with each other so I can give you a higher quality reply.
- tanderson92 9y ago
  they follow different indices and have similar returns. Please explain how this is possible while still underperforming what they 'should' be returning. Are both indices being front-run? But if they reconstitute at different times how is this possible. And yes, you do sound snarky.
  - quantgenius 9y ago
    > they follow different indices and have similar returns. > Please explain how this is possible while still > underperforming what they 'should' be returning. They are both equity indices and equities are highly correlated to each other. The first principal component of global equity returns explains over 50% of the variance. > Are both indices being front-run? Yes! If a stock is getting added (or dropped) from an index, this is typically announced (depending on the index) between 3 days and a month before the date on which the change to the index is made. The index itself is calculated assuming you bought (or sold) precisely at the close on the day of the reconstitution. Index fund managers are incentivized to match the index. They actually do worse personally if they modestly outperform the index and potentially get fired if they underperform. So every index fund manager wants to buy (or sell) the stock entering (or leaving) the index at precisely the same time on the same day. This means you could potentially have as much as a few months trading volume wanting to transact on the same side at precisely the same time. Smart traders take advantage of this by a) Buying (selling short for deletes) the stock over time before the index is reconstituted. b) Selling what they bought and short selling more (or buying) stock to the index funds at the close and c) Covering their shorts (or selling the excess stock bought) over the next few weeks. The fund managers don't care because even though a typical proprietary trading desk makes tons of money doing this, as far as their clients are concerned, they are matching the index. You could move a stock 50% in the rebalance but you wouldn't notice if you were comparing a fund's returns relative to the index. This is fairly obvious if you simply take a look at price charts of stocks entering and leaving indices around index reconstitutions. Academic studies (use google scholar for a few dozen references) estimate that the typical index addition or deletion to the S&P 500 index moves between 2-4% between announcement and reconstitution. This is an underestimate of what actually happens because adds/deletes are predictable and stocks start moving long before the announcements are made. S&P 500 stocks are the most liquid stocks on the planet and the effect is much larger for other indices. The Russell indices are not much more or less gameable than other indices per add or delete but the effects are concentrated since all Russell Index rebalances happen on a single day (fourth Friday in June) which creates massive jumps in PNL for proprietary trading desks right around that time. It's also fairly obvious if you look at the data carefully that in recent years with the increasing popularity of index funds, the indices are understating the potential returns available in the stock market. The market has done "better" than the oft-quoted returns on the indices would have you believe. > But if they reconstitute at different times how is this > possible. Why would the timing of the reconstitution have anything to do with why this is possible or not?